This report describes the potential impact of federally-mandated increases in vehicle fuel efficiency standards and other trends on fuel taxes, which are a major source of revenue for the Special Transportation Fund (STF). The STF is the funding source for highway and public transportation projects and programs in the state. The report finds that while the standards may reduce STF revenues by less than $2 million in 2012, the potential impact increases sharply in subsequent years as the standards apply to an increasingly large share of the vehicle fleet. In the longer run, the growth in electric and other alternative fuel vehicles may also threaten STF revenues.

The report also discusses alternatives to deal with this potential loss of revenue. These include reducing the scope of the state's transportation programs and expanding the base of STF funding to include tolls or charges based on vehicle miles travelled (VMT).

CREATION OF THE STF

The STF was created in 1984 to arrest the deterioration of the state's transportation infrastructure. The earlier Transportation Fund had used dedicated revenues to fund highway and transportation development projects. It also paid for other costs, including those associated with the Department of Motor Vehicles (DMV), the State Police, and other agencies and programs. The fund was terminated in 1975, and thereafter an increased emphasis on other priorities led to a decline in bonding for highways.

In 1980, the resulting deterioration of the transportation infrastructure led to the passage of SA 80-79. This act directed the Department of Transportation (DOT) to evaluate each state bridge and highway, classify its condition, and submit a 10-year resurfacing and bridge repair plan to the legislature. DOT reported that 63% of the state highway network and 61% of state bridges were in “less than good” condition. DOT estimated that it would cost $1.6 billion to reverse these conditions. The report also noted that in the absence of significant increases in maintenance funding, the state could anticipate a dramatic increase in bridge load restrictions and a possibility of bridge closure and collapses.

On June 28, 1983 a 100-foot long section of Interstate 95 collapsed into the Mianus River in Greenwich, killing three people and seriously injuring three others. Within two days, the legislature passed and the governor signed a bill creating a fund supported by one cent of the fuels tax. A subsequent special session in October 1983 provided additional bond authority to repair the Mianus River Bridge. The legislation expanded the road and bridge repair program so that DOT could meet its first year target under the 10-year program. In the 1984 regular session, Governor O'Neill presented his Transportation Infrastructure Renewal Program and PA 84-254 created the STF.

The act creating the STF dedicated three types of revenues to back transportation bonds: motor fuels taxes; motor vehicle receipts; and license, permit, and other fee revenue. Motor fuels taxes consist of the gasoline tax, the special fuels tax (which is levied on fuels used or sold by distributors), and the motor carrier road tax (which is levied on fuel used by trucking firms and bus companies). Motor vehicle receipts are derived from DMV for various licenses and services. The final source of funds came from motor vehicle fines, fees for drivers' licenses, and similar sources.

SUBSEQUENT CHANGES TO THE FUND'S USES AND RESOURCES

Uses

Originally, the STF was designed to cover only the direct costs of the transportation infrastructure program. But, starting in 1987, the legislature transferred a series of agency costs from the General Fund to the STF, in part due to growing General Fund deficits. Among the costs transferred were those for fringe benefits for DOT and DMV staff and, for a time, the highway patrol functions of the State Police.

Resources

As described in OLR Report 97-R-0999, it was clear when DMV expenses were transferred in 1991 that the STF would not be able to avoid future deficits if additional revenue was not put into it. The legislature increased the fuel tax to coincide with the transfer. This consisted of an initial increase to 25¢ per gallon on July 1, 1991 followed by eight incremental increases that brought the tax to 34¢ by January 1, 1996. The decision to transfer the State Police expenses necessitated an acceleration of the schedule. PA 93-74 made the scheduled increase to 34¢ effective on October 1, 1995, three months sooner than previously required, and added five more 1¢ increases for each of the next five calendar quarters. The last scheduled increase went into effect on January 1, 1997, bringing the gasoline tax to 39¢ per gallon

PA 97-309 reduced the gasoline tax to 36¢ per gallon as of July 1, 1997 and 33¢ as of July 1, 1998. PA 2000-170 reduced the tax to 25¢ a gallon as of July 1, 2000. It also transferred certain vehicle sales tax revenues from the General Fund to the STF and eliminated a requirement that any annual fund balance over $20 million be used to reduce debt service on transportation special tax obligation bonds.

PA 02-1, May 9 Special Session increased the tax on diesel fuel to 26¢ per gallon. PA 07-199 established a three-step increase in the diesel fuel tax from 26¢ to 36¢ per gallon as of July 1, 2007; 36.8¢ as of July 1, 2008; and 38¢ as of July 1, 2013. PA 07-1, June Special Session, established a new process for the Department of Revenue Services (DRS) commissioner to set the sales tax rate on diesel fuel based in part on its wholesale price.

Transfers

PA 2000-170 required the DRS commissioner to transfer part of the petroleum products gross earnings tax revenue attributable to sales of motor vehicle fuel from the General Fund to the STF. Initially, the transfer was $5 million per calendar quarter. The size of the transfer was subsequently modified several times. PA 06-136 substantially increased this transfer starting in FY 07, with several further increases between then and FY 14. In FY 11, the transfer is $165.3 million per year, increasing to $179.2 million starting in FY 14.

Under prior law, if in any quarter the receipts from the petroleum products tax were less than the amount required to be transferred, DRS had to certify the amount of the shortfall to the state treasurer who then had to transfer an amount equal to the shortfall from the General Fund. PA 06-136 requires that these transfers be made if the receipts from the tax are less than 25% of the amounts required by law. It also makes the state comptroller, rather than the DRS commissioner, responsible for certifying the amount of the shortfall to the treasurer and for making the transfers to the STF.

There have been a number of other transfers to and from the STF. Among the recent actions, PA 09-3 of the June Special Session transferred $3 million annually from the STF to the Conservation Fund starting in FY 10, but this provision was repealed by PA 09-8, September Special Session. The latter act also transferred $81.2 million from the General Fund to the STF in FY 10, $126 million in FYs 11 and 12, and PA 09-111 transferred $6.5 million from the STF to the General Fund.

FUTURE REVENUE AND EXPENDITURE TRENDS

In recent years, fuel tax revenues have grown slowly, from $483.9 million in FY 05 to approximately $495 million in FY 09. A prospectus issued in October 2010 by the state treasurer in connection with the issuance of STF bonds projected that motor fuels tax revenues would rise to approximately $504.7 million in FY 14 at current tax rates, an increase of less than 2%. In projecting the fuels tax revenue increase, the prospectus considered a variety of factors, including the fuel efficiency of passenger and commercial fleets, the price of fuels, and economic activity. Other STF revenues are projected to increase at a somewhat faster pace over the five-year period.

Fuel Efficiency Standards and STF Revenues

Changes in federal law will likely reduce motor fuels tax revenues going into the STF. In May 2010, the Environmental Protection Agency (EPA) and the National Highway Traffic Safety Administration (NHTSA) issued a joint Final Rule to establish new light-duty vehicle fuel economy standards. The standards apply to passenger cars, light-duty trucks, and medium-duty passenger vehicles, covering model years 2012 through 2016. The rule requires automakers to improve the fleet average fuel economy of their vehicles by roughly 5% each year. The final rule took effect on July 6, 2010.

The agencies project that the new rule will substantially reduce fuel consumption, even after considering the “rebound effect.” This is the phenomenon that consumers will likely use part of the monetary savings attributable to the rule for vehicle travel, thereby partially offsetting the rule's impact on fuel consumption. Table 1 presents the agencies' estimate of the reduction in gasoline consumption at the national level,

an estimate of the reduction in Connecticut based on its historical share of national gasoline sales (1.1%), and the fiscal loss to the STF at the current gasoline tax level. It also shows the total pledged STF revenues, as projected by the prospectus.

Table 1: Potential Impact of New Fuel Efficiency Standards on Gasoline Tax Revenue

As the table indicates, the initial revenue loss attributable to the new standards would be quite modest relative to the size of the STF, but would increase sharply over time. If STF total revenues continue to grow slowly, the impact would be noticeable within the life of bonds issued to finance transportation improvements, typically 20 years or more.

The impact of more fuel-efficient vehicles on petroleum products gross earnings tax revenue is more difficult to estimate, as it will depend on the future price of fuel. Moreover, under current law, specified amounts of the tax revenue must be deposited in the STF. As a result, any decline in revenues associated with more efficient vehicles would be borne by the General Fund.

There will be a small offset against the motor fuels tax revenue loss. EPA estimates that the new standards will increase the cost of vehicles an average of $1,300. This will increase the sales tax revenue produced by the sale of such vehicles by private parties other than dealers, which is deposited into the STF.

NHTSA and EPA plan to begin a process for evaluating and setting additional standards to further improve fuel efficiency for passenger cars and light duty trucks built in model years 2017 and later. They are also developing joint regulations to improve fuel efficiency for commercial

Vehicle's. The agencies announced the first national emissions and fuel economy standards for heavy vehicles on October 26, 2010. The proposal, scheduled to become final next year after a period of public comment, will apply to tractor-trailers, buses, and many other classes of vehicles and will cover model years 2014 to 2018. The proposed policy would apply different standards to different vehicles, based on weight and intended use. For example, tractor-trailers would be required to reduce fuel consumption by 20% by 2018. Other work trucks would have to reduce fuel consumption fuel standards, by 10% to 15% by 2018. The agencies expect to adopt the standards by 2014. Any loss of tax revenue resulting from such standards would be in addition to those described above.

Alternative Fuel Vehicles

In the longer term, another threat to gasoline tax revenues is the introduction of alternative fuel vehicles, notably electric vehicles. A 2010 analysis by the firm Pike Research forecasts that the market for plug-in hybrid and battery electric passenger cars and light duty trucks will grow at a compound annual growth rate of 106% between 2010 and 2015, resulting in sales of more than 3.24 million vehicles during that period. However, a 2010 study by Deloitte Consulting projects that high cost of batteries and limited driving range will limit the market penetration of electric vehicles to 2% to 5% by the end of the decade, suggesting a proportionate drop in motor fuels tax revenues. The study estimates that even if the cost of batteries falls substantially during this period, the cost of the battery pack alone in the Nissan Leaf would be $14,400. The car's current manufacturer's suggested retail price is approximately $33,000.

While the impact of alternative fuel vehicles on STF revenues is likely to be minor in the near and mid-term future, such vehicles may pose a greater risk in the long term.

Finally, to the extent that expansions of public transit such as the New Haven-Springfield commuter rail service divert motorists to other modes of transportation, they will also reduce fuel consumption and thus STF revenue. The scale of this impact cannot be determined at this time.

Expenditures

Total STF expenditures rose from $935.9 million in FY 05 to $1.1 billion in FY 10. The Office of Fiscal Analysis (OFA) November 15, 2010 Fiscal Accountability Report projects that the STF net expenditures will increase to $1.34 billion in FY 14. It projects that the STF will have an operating deficit of $39.6 million in FY 13 and an operating deficit of $38.2 million in FY 14. OFA also projects that the STF will have a cumulative deficit of $3.9 million by FY 14. As noted above, the projected revenue loss to the gasoline tax in these years is $3.6 million and $6.3 million, respectively.

LEGISLATIVE OPTIONS

Reducing the Size of the Transportation Program

The state could respond to the decrease in fuel tax revenues by shrinking the size of its transportation program. However, currently approximately 40% of STF expenditures are for debt service. In FY 14, the prospectus indicates this proportion will be approximately 37%. In addition, a substantial part of the agencies' operating costs covered by the STF is for personal services incurred under union contracts.

Increasing Fuel Tax Rates

Offsetting the revenue loss from the efficiency gain resulting from the federal standards would require a relatively modest increase in fuel tax rates in the early years of the standards. However, it is unclear whether the legislature would choose to increase fuel taxes, particularly while the overall economy is still weak. Moreover, the tax rate would have to increase steadily in order to compensate for the increasing fuel efficiency of the fleet as an increasingly large share of vehicles are subject to the standards.

Tolls

There has been a great deal of interest in the state in re-imposing tolls on major highways as a means of funding transportation. However, as discussed in OLR Report 2009-R-0122, federal law severely limits the circumstances tolls can be imposed on existing federally-funded highways. (In Connecticut, these include the Merritt and Wilbur Cross Parkways, as well as the interstate highways.) Federal law does permit tolls on new, non-interstate highways and new lanes on all highways. It also permits, under specified conditions, tolls to be placed on reconstructed portions of highways. But as the report indicates, it appears that Connecticut would have to repay the federal government substantial sums if tolls were to be placed on existing highways that are not being reconstructed.

VMT-based Charges

Directly assessing road users for the costs of individual trips under a comprehensive fee scheme could generate substantial revenue to cover the costs of transportation programs. This approach would use communications and information technology to assess charges according

to miles traveled, the road used, and other conditions related to the cost of service. Unlike conventional tolling, which only works on expressways, road use metering could be used to manage and provide funding for all types of roads.

Among the issues to be decided under this approach are (1) whether it is primarily designed to raise revenue or reduce traffic congestion, (2) who sets the fees and controls the resulting revenue, (3) how fees are set, and (4) whether and how to involve the private sector. Establishing a VMT-based system raises a number of privacy and fairness concerns that would also need to be addressed.

A 2010 study by the RAND Corporation notes that VMT systems have not been tested on a sufficiently large scale to know how to counter attempts at breaching privacy or security, whether they can be as reliable when operating on a large scale, or what the system failure rates and operating costs will be when millions of vehicles are involved. The study is available at http://www.rand.org/commentary/2010/05/14/RFF.html.

Other Options

A number of other states have privatized existing toll facilities (e.g., the Indiana Skyway in Illinois), authorized private firms to construct new toll highways under franchise (e.g., the South Bay Expressway in California), or constructed highways using a public-private partnership (the high occupancy-toll lanes on the Capital Beltway in Maryland (I-495)). It is not clear to what extent Connecticut could privatize existing non-toll facilities.

HYPERLINKS

fuel economy standards

(http://www.epa.gov/otaq/climate/regulations/420f10901.htm)

fuel standards

http://topics.nytimes.com/top/reference/timestopics/subjects/f/fuel_efficiency/index.html?inline=nyt-classifier

analysis

http://www.pikeresearch.com/research/plug-in-electric-vehicles

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